Generic-Drug Stocks Still Under the Weather

An outbreak of Big Pharma flu has struck the generic-drug industry, causing sickening returns for investors who had been counting on these defensive investments during economic uncertainty.

Shares of most major generic-drugmakers have traded below the S&P 500 for the 12 months ended May 23, and that index was off nearly 10%.

In addition, several generic-drug makers have performed below an index of large-drug companies, and that's a big target to miss. The Amex Pharmaceutical Index is down 19%.

Among the prominent players, the exception to the malaise is Teva Pharmaceutical Industries(TEVA Quote - Cramer on TEVA - Stock Picks), the world's largest generic-drug company. Teva's shares are up 13% for the past 12 months. Its market capitalization of $35 billion is nearly triple the combined market caps of other independent competitors cited in this article.

The world's second largest generic-drugmaker is the Sandoz division of Novartis (NVS Quote - Cramer on NVS - Stock Picks).

Although the generic-drugs business is an intense, commodity-like affair, current economic conditions and today's drug-industry environment should, in theory, prompt cheers from investors in the group.

Major brand-name drugs keep losing patent protection, and an expensive flood of patent expirations should occur during the 2010-2012 period. A U.S. Supreme Court ruling last year on patent-protection in a nonpharmaceutical case could help the generic-drug industry by making it easier for generic-drug makers to challenge certain patents.

Meanwhile, managed care firms keep pressuring doctors and consumers to choose generics over brand-name drugs. The eroding economy has reinforced consumers' efforts to save money on medications.

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